It's Management, Stupid!

I have always believed that banking has been stocked with poor managers - I don't mean retail banking but the stuff where they make the profits and blow them. Regularly.

This is not a new phenomenon. Indeed, Gordon Brown has always labelled the Conservatives as 'Boom and Bust' merchants and that description was largely attributed to their cycles driven by investment banks making big profits and then blowing them in relatively short order. Nicholas Taleb contests that banks only ever really make money out of loans, mortgages and other products to businesses and people - all the other profits they make they surrender.

While the above statements are not entirely accurate, banking is one of the few industries where an incredible focus goes on making money with money to lavish huge rewards and then as busts come, they simply surrender the profits, make a ton of backroom people redundant and then carry on as if nothing has happened. Why would you run a business to do that?

This particular cycle, although a massive crisis around the world that has taken more then just surrendering profits to resolve, is not different. At the core of it is not just the bonus culture, it is not even the derivative type products that can be so destructive, it is not even that the financial system has its own in-built self-destruct or that many of the products are for banks alone to play with - all of which are highly toxic when mixed together. Nope, you can survive all these things so long as you have decent management - and that has always been what was missing.

If we drove our car recklessly and crashed it as a result, we would tend to learn our lesson and so not do it again. But there are those in life who actually thrive on the risk of crashes and love the sensation of speed. Normally, such people would try their hand at racing cars and exercise their urge at purpose made circuits where their activities are well managed and the dangers are minimised. But there are those who insist on continuing their hobby on our roads - they are a huge danger not just to themselves but to us all. Their activities can damage our cars or even hurt us. In extreme, they can kill.

In all cases, these people can, at some point, do it again. Unless, that is, we make them drive slower. We can put cameras and signs up, put bumps in the road or more traffic lights but ultimately if they want to speed, they will. The only real way to slow them down is to make their cars slower.

This analogy is like management. Managers will be reckless if left in an environment where there are few controls, all of which can be ignored if not enforced rigorously. Even the threat of transgression fuels the urge. Not until the business is modified so it cannot do the dangerous things, will managers stop doing them. In banking, this is precisely the issue. They are driving fast cars on our roads and they can kill. Unless we make them modify their cars, they will kill just as they have done in the last year.

The heart of the issue is not the free availability of fuel (money), it is not the way they transact business (the roads), it is not they way they drive (their bonus culture) - it is the cars they use. Give them lesser cars and they can only drive slower.

This will take a different type of manager.

The management of banks, having suffered their reprimands having caused untold damage have clambered straight back in and they are driving just as, or even faster than, before.

Henry Mintzberg, Professor of Management at McGill University, has an interview in this month's Director Magazine. It augments exactly the point I make.

Is the Worst Over?

You really can do without a patronising person looking down their nose at you telling us we are all idiots. But on Radio Five Live this morning we got just that with Barbara Knight of th British Bankers Association (BBA), as she droned on like a very disinterested mimic of Margaret Thatcher.

She epitomises the attitude of the finance industry that has got us into this mess - the attitude of don't focus on the losses as they were 'extraordinary' (a word she used a lot) but to focus on the profit. She pointed us at sub-prime as being the root cause of the crisis when it is patently obvious that any one part of a high risk house of cards that is the financial system could have brought it down. She seems to think that had Governments not stepped in, many banks would have survived which is not true as the whole mess is so inter-related that each part affects another and even vice versa.

Meanwhile, a chap called Kaiser who presents a show called the Oracle, laughed at the stupidity of the way we have piled so much money, and more again yesterday, into a broken system when he believes we still have more bad news to come on debt write offs. In fact, he argued that far more of the bailout money should have gone on saving jobs which has been a theme of mine having seen how Germany and France and have directed their cash and are out of recession now.

The words of Brown saying how he always called the right shots look ever more deluded as we continue to pour money into a system that is happy to absorb it for its monumental and colossal losses. How we have let these bankers get away with it and how they can live with themselves in taking bonuses is beyond most decent people.

Finally, it seems that RBS executives are doing us some sort of favour by deferring their bonus as I predicted they would - until 2012. The question is, for what should we reward them when they have just got the taxpayer to write off a further £10bn of debt they no longer have to pay? And where is this mythical talent Knight says we should be paying top dollar for when the same priceless idiots lost so much in the last year? The whole finance industry needs a shot of cold reality.

We need a radical change at the top in this country as it is costing us our future.

Fighting For Democracy

Gordon Brown was one of the first to congratulate Hamid Karzai for his 'walkover' win of a second term as President of Afghanistan as the only candidate withdrew, knowing he endangered the lives of his threatened citizens if he continued.

I am sure there will be celebrations at Barracks all over the country to see this great piece of democracy that so many brave people have died for.

It's not worth writing any more on the subject but the whole election was a fiasco and rigged - now we have the culprit back in power to run the corrupt regime again.

As we learn of the death of another brave British soldier killed on the last day of his tour of duty by a roadside bomb he was defusing, it was predictable and cynical that our PM phoned his congratulations to Karzai than call the wife of Olaf Smit to console her.

We are all very proud of men like Olaf and all those who have died or been injured in the line of duty in Afghanistan and Iraq - today was a body blow to their fight for us, on top of the controversy about whether they are adequately supported in terms of kit, transport and reservists.

Bring them home, now.

What a Great Deal?!

You couldn't make it up but I suppose it's to be expected.

Today, our prize investment, RBS, having just got the details of the extra £30bn we are pumping into it, has announced it is shedding around 4,000 jobs.

It makes you stop and think. Recently, there was a lot of controversy in that RBS' investment bankers will be getting fat bonuses this year and, indeed, their CEO, Stephen Hester, is in line for a £9.6m. They may get some deferred but that will really sit well with the 4,000 who will pay for them. In fact, around 16,000 jobs have already been shed from the back room, branches and other places - the sort of jobs that the expensive adverts on TV about NatWest and their push for more personal banking might be lead us to believe have not gone.

4,000 jobs and let's say the average salary is £30,000 per annum - that would be £120m off the wage bill this year. That will probably be less money saved than the bonus bill.

But it gets better. 700 branches of British banks will be sold to other companies in the fire sale of the decade as the EU rules that banks that got state aid must split. Private Equity houses and foreign banks will love this as they will buy already stripped down versions of the banks branches with redundancies already paid for by the taxpayer and because so many branches will be up for grabs they will be sold at rock bottom prices, once again leaving the taxpayer with the mired end of the stick.

It gets better than that. Having given away the jewels of the banking industry cheap and subsidised by us, they will be precisely the same buildings, staff and products as before just owned by someone else who will reap the profit on our loans and mortgages rather than us at least contributing to the value of our 'investments', i.e. the banks we saved. We are told it will promote competition - sure it will. Why would anyone buy the banks and then trash the price when there is so much cash and profit to be made? Prices will remain the same, believe me.

And is it good that Tesco buys into a bank? They squeeze the living daylights out of suppliers and only pass on part of the savings to customers which makes them ever more profitable. We are handing them a cash business to make them more money. Meanwhile, Virgin must be laughing as they offered to buy Northern Rock when no one else would and when it was leaching money - now they get to buy the cleaned up good part at a knock down price with a great deal more advantageous loans from the Government to lend at a large profit.

Alistair Darling kept a straight face as he announced all this. He didn't want to let on that we have all just been right royally shafted. The smiles will come later.

The Recruitment Industry Is Broken

Recently, on announcing sharply decreased profits, the CEO of high end recruiter, Heidrick & Struggles (H&S), L. Kevin Kelly, dourly warned that the recruitment industry's 55 year old business model was broken.

Citing the growth in DIY recruiting tools now available to firms and the waves of online search facilities at companies like LinkedIn, there is no doubt that there is a huge squeeze at the mid-market and low end. Finding candidates is no longer hard and the best value recruiters can be is an external sifting resource on generally available candidate information rather than having CV repositories as in the past. It certainly means that the age-old James Caan mantra of 30% of the first year remuneration as a fee per hired candidate is no longer a viable structure in this market and, as the recession bites, companies have not only reined back on recruiting activities but are now shopping around a great deal more.

It was inevitable really - recruiting in its regular form has had a good run for the money and the money has been exceptionally good. Even at the high end where H&S headhunt highly remunerated Board positions the market is also experiencing an erosion of fees as web based matchmaking services come onto the market to compete at much lower prices. H&S is a super, debt free and cash rich company and can survive but it now sees its future in a radically changed market model. In the past, search has yielded around 90% of its fees - in the future it will shrink to only 50% while 40% will be taken up by executive retention and coaching services, another 10% on tools to support this. For this to change, H&S is actively seeking acquisitions with its $183m cash war chest.

That sounds fine for companies like H&S but for smaller players, heavily exposed to the contingency recruiting market, this is impractical. Few have the cash resources to acquire such services and skills while many are still clinging desperately to an increasingly valueless model. There is no way companies will pay 15-30% of first year remuneration for a few clicks of a mouse and a first interview at best. Few recruiters have 'skin in the game' like performance linked fees and few come from the industry they are recruiting into, let alone have done the roles of the people they are identifying as talent.

Value is the key to the future for recruiters or volume, and the latter means more streamlined, web based service. Clients in the industry haven't helped the process with many driving the value out of recruiting by hammering on fees to the extent of running web based reverse auctions for volume placements. The whole recruiting industry is being squeezed from both ends in a market in recession. With the credit crunch to boot, it has been the 'Perfect Storm' and many recruiters who have suffered badly may never regain the lost ground as the market must change to deliver greater value to clients.

Companies like H&S are moving in the right direction when it comes to their high end market. But for mid to low end salary ranged specialists, life will get ever tougher as they are at most risk by the low cost, high volume models from the web. Even James Caan's golden touch has tarnished as his latest investment has struggled badly and only the agents in the City have done well recently.

There is a desperate need for a daring change in the business proposition and model in the recruitment industry that needs to resonate with clients and deliver real value. The days of large contingency fees for a few hours work are long over. Who will deliver the new model? Will clients respond?

The next year is crucial to the recruitment industry.

Anthony Holmes - Management Idiot?

According to his biography in today's Sunday Times Appointments Section on page 6, Anthony Holmes describes himself as an international corporate turnaround specialist and transitional leadership expert. Sounds good.

His article is about the Postal Strike and situation at the Royal Mail asserts how a leader is required and not a manager. It is his opinion that Winston Churchill would be the ideal man for the job to solve the current stand off between Union and management as his wartime 'quintessential leadership' would help take the situation by the scruff of its neck.

Anthony Holmes is no doubt an intelligent man but Churchill, while indisputably a fantastic wartime leader who led Britain to survival and victory at our direst hour, had previous form when it came to strikes.

Churchill solved the General Strike by sending in troops - an action that arguably strengthened the resolve of workers and unions in Britain for the best part of 90 years. His actions were despised so greatly that someone as mild as my grandmother could not speak his name without invoking the dire days of his methods to solve the strikes which profoundly affected the people in South Wales in particular. It even tarnished his undoubted genius of wartime leadership in her humble eyes.

If Holmes had bothered to look into Churchill's past, he would have realised that Churchill would have had only one method of solving the stand off - to send in troops to break the strike and force the workers to accept whatever their fate was deemed to be by a truly incompetent and overpaid management. What a super idea that would be.

Perhaps those employing Mr. Holmes for his specialism and expertise aren't actually too worried about his experience, qualifications, knowledge of his subject or historical characters. Like Ron Sandler, his price is reassuringly expensive enough to not ask questions.

Air Shots

Some while ago I blogged on how many golfers, when faced with an immovable object like a tree blocking their route to the green, will choose to hit through the tree rather than round it in the vain hope that there is more clear space than branch to be hit.

I argued that the reality is that by using a club of a specific loft and length you actually narrow the area of tree you are aiming at and in that 'corridor' of the shot you actually increase not decrease your chances of hitting branches as you increase the amount of space occupied by the branches in the corridor with respect to the total available space in that corridor. When you think about it, you are taking the very randomness of the tree's branch arrangement out of the equation by hitting at it. The logical course of action would be to take the tree completely out of the equation and go around it using two shots rather than risk wasting shots.

I would argue this is precisely what happened on Quantitative Easing (QE) by the Government. In piling a ton of cash at a problem, they viewed the financial crisis as a tree blocking their way to rescue. Their logic was that if you pile so much money at the problem some of it has to get through. But that was the wrong assumption as banks needed an extraordinarily large amount of money to shore up their huge lending gaps - RBS' alone was £161bn and the total QE to date has been £175bn.

What has happened is that the QE has been horded by the banks as free new money which they use to play casino banking or just keep. Very little of it has got into the wider circulation as the recent M4 figures on money supply has shown. In fact, the money measure M4 decreased despite QE.

This was the equivalent of a golfer hitting a ball directly at the tree and hoping they hit a gap to get through. If only someone had stopped and thought what the real cause of the banking crisis was then QE would not have been the best measure to deal with it or at least they could have thought of a better way to introduce it. In fact, by buying bonds in our own debt, they played right into the hands of the very banks that caused the entire problem who had been commanded by the Government and FSA to do precisely what QE allowed them to do - increase their capital to lending ratios without lifting a finger.

In hindsight it was obvious but it has been the modus operandi of the Government in this whole crisis. They have paid millions for duff advice from bankers and think they did the right thing. Now all the real measures of our economy like GDP and money supply show that what they did was either wrong or wrongly executed. You cannot argue with the figures, our management of the crisis was sheer panic measures.

Now we have the great bank sell off bonanza to come. The proposal is that new high street banks will be created in the new market conditions free of encumbrances. Investors are going to have a field day as we split profitable businesses from bad ones and sell them off nice and cheap and just watch how much profit foreign and private investors will make on our business. You can feel exactly what will happen and a few years down the line we will find every single one of our High Street chains of banks will be owned by foreign companies profiting out of our mortgages and lending needs.

You don't believe me? Our utilities have already gone that way in water and power, many High St banks are foreign owned already like Alliance & Leicester, Abbey, HSBC and the Royal Mail will be sold to a foreign company. In each case, the dirty end of the stick will be held by tax payers as we pay the profits of our mortgages to foreign companies.

You could not invent a better strategy to waste tax payers money by constantly leaving them with the bills while the profitable bits of the businesses they bought are sold off. But that is the key to the Government plan - the taxpayer is there to fund the rubbish.

As a quick for instance, the good part of Northern Rock will be sold for £1bn and we will still be owed £27bn when that happens plus the liabilities. Great deal, eh? Just watch the rest of them.

Meanwhile, us would-be golfers have learnt our lesson - it's better to hit round the tree than at it.